Cryptocurrency, blockchain challenges and opportunities detailed

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Public power officials from the Pacific Northwest, the Midwest and the East Coast on Nov. 12 detailed the challenges and opportunities tied to cryptocurrency mining and blockchain at the American Public Power Association’s Public Power Forward Summit in Austin, Texas.

Summit attendees heard from Steve Wright, general manager of Washington State’s Chelan County PUD, Casey Crabtree, Director of Economic Development at South Dakota-based Heartland Consumers Power District, and Andrew McMahon, general manager at Massena Electric Department in New York State.

Cryptocurrencies – Bitcoin is probably the most well-known example – use blockchain technology to store the data from individual transactions securely and anonymously. Cryptocurrency miners earn money by adding blocks to the blockchain and by releasing more cryptocurrency by solving complex mathematical operations.

Locating mining operations in places with low cost electricity gives cryptocurrency miners a competitive edge, so many miners are looking to set up shop in the territories of public power utilities.

Chelan PUD

“We have among the lowest rates in the country at 3.2 cents retail on average for residential, commercial and industrial,” Chelan PUD’s Wright noted at the Public Power Forward Summit.

“That might make you think, well, ok, so this cryptocurrency problem is going to be unique to utilities that have low rates,” Wright said.

“So here’s the thing that we don’t know. We don’t know for sure whether this is just the beginning of an influx across all utilities or whether it stops shortly after you get around five cents a kilowatt hour,” he went on to say.

Wright noted that “you can go online and you can find folks who will describe the economics for cryptocurrency mining to you and at roughly ten thousand dollars of Bitcoin, you can make money at about 13 cents a kilowatt hour.” He added, “You would invest about six or seven thousand dollars” in an ASIC machine “and you will get your money back in eight to nine months and then after that it’s pretty much pure profit.”

From Wright’s perspective, the question around how much electricity cryptocurrency will ultimately consume is based on what the real value of cryptocurrency will be, because two-thirds of the manufacturing cost of cryptocurrency is based on the cost of electricity.

“So really it’s a play of electricity costs versus the cryptocurrency value and what’s unknowable right now is what the cryptocurrency value is going to be,” he said.

Wright noted that load tied to cryptocurrency mining is unique. Among other things, he said that there is a “tremendous mismatch in the business proposition because utilities are investing while cryptocurrency loads are subject to a volatile commodity price and are easily portable.”

He noted that “we have an aluminum plant in our county that uses 265 megawatts of Chelan PUD power, so it’s not like we’re not willing to deal with large loads. But the aluminum plant came and made a very large investment to build the plant and you knew they were going to be here for a while.” But it is “not the same way with cryptocurrency load, which is, ‘I’ll be there, but I can’t guarantee you whether I’m going to be there a year from now, or even a week from now – and maybe not even in the same location.”

Wright said that “We are very close to the end of a rate process” related to cryptocurrency mining operations. “We expect to adopt a rate by the end of December that will be a unique rate for cryptocurrency that does a better job of taking into account the risk associated with cryptocurrency loads. After that we will have a rate that leaves our other customers financially neutral to a crypto load locating in Chelan County.”

Community reaction

Wright also discussed the community’s reaction to cryptocurrency mining operations. “We have a community that really cares about their PUD, show up at our meetings and participate pretty actively in these meetings – in fact, these meetings drew some of the most people we’ve ever had show up for a PUD issue,” he said.

“They were, not surprisingly, worried about the rate impacts on them,” he noted.

Community residents also raised environmental concerns. “We had a lot of folks showing up, saying, ‘hey, wait a second, if you’re building this much load, it’s going to have impacts on generation, transmission and distribution someplace, so where is your environmental analysis?’

In addition, Wright added, “we had, I would say, about a third of the people who showed up at our public meetings question whether this was the type of activity Chelan County wanted to be involved in -- so is this a moral activity given the reported uses for illicit activities?”

Safety concerns

“The safety issue turned out to be huge in our community,” Wright said. He noted that some cryptocurrency mining operators had “a general disregard for how the utility system works. In some places you can operate these machines remotely, so they would stick them in a location, create a fire risk and then not even live here.”

That has resulted in an incredibly negative backlash in our communities with respect to whether there is a way to ban this activity, particularly in residential areas. Wright went on to say, the city of Chelan “has now banned it. The city of Wenatchee is on the verge of banning it. Our county is going to consider zoning codes. The other cities are considering codes as well,” Wright said.

“It’s not an outright ban because you can still go to certain places – what we call cryptocurrency zones,” he noted. “But in residential neighborhoods, there is a significant cost and risk that raises health and safety issues.”

Other Washington State public power entities also address cryptocurrency mining

Other public power entities in Washington State are also moving to address cryptocurrency mining. In late July, the Franklin Public Utility District in Washington State put a temporary moratorium on “high density load” applications.

Commissioners for Washington state’s Grant County PUD unanimously agreed in May to move forward with the creation of a new customer rate class for cryptocurrency miners that would protect the interests of the utility’s existing customers. Mason County Public Utility District 3 commissioners on April 10 approved a moratorium on accepting applications for service to “cryptocurrency” operations. The city of Wenatchee, Wash., this year also imposed a moratorium on cryptocurrency mining.

In March, Washington state’s Benton PUD said that in response to growing customer interest in cryptocurrency mining and blockchain operations, coupled with concerns about distribution system safety and reliability, its Commission approved an electricity intensive load policy.

Heartland Consumers Power District

Meanwhile, Heartland’s Crabtree noted that one of the incentives that Heartland Consumers Power District uses that “really draws folks in” is the Energy ONE incentive. The program provides a special energy-only rate for new retails loads with an approximate demand of one megawatt or larger.

Heavy users of electricity typically pay a separate demand charge to have energy capacity available to them at all times, Heartland Consumers Power District notes. Since it can be difficult for a new business to estimate what its monthly demand will be, the Energy ONE Incentive eliminates this concern for the first three years.

Heartland provides wholesale electric energy to municipal electric systems in South Dakota, Minnesota and Iowa. It also provides energy solutions to six public institutions in South Dakota and have short-term block or unit contingent contracted requirements with other organizations.

“If we use the Energy ONE incentive, we can help new and existing businesses plan for the future, so if we can reduce risk, we can facilitate growth,” he said, noting that this incentive “became attractive for blockchain.”

Crabtree said that there is “a chance that Bitcoin will kind of run out of steam, so to speak. It faces a lot of competition.” Blockchain “is here to stay. So that’s really why we jumped into this and said we better embrace this challenge and understand how we can use this to grow our communities,” he said.

“Why the Midwest? Why they looked at us?” Fair electric rates have been one factor, Crabtree said. Another factor for why the region has been a draw for blockchain operations is the weather, he said. “They were looking for something that’s colder – they don’t have to run their air conditioners so much.” Other factors cited by Crabtree are an educated workforce and affordable land and buildings.

“As far as why we found it a perfect fit for us,” he noted that an increase in electric load benefits all customers. Crabtree also said that “we think it is beneficial to our customers who are seeking growth.

Massena Electric Department

Among the concerns that Massena Electric Department had related to cryptocurrency mining operations related to infrastructure. “How far to push our system and right off the top, we knew that some areas had lots of capacity that had been sitting idle for awhile, and other areas were at their limits,” McMahon said.

The utility also considered the question of what such operations would mean for the community. “Is it going to create any jobs, is it going to make any difference in improving our plight,” he went on to say.

The New York Public Service Commission in July approved new electricity rates for Massena Electric Department that the PSC said will allow high-density load customers, such as cryptocurrency companies, to qualify for service under an individual service agreement. The PSC said that the individual service agreement tariff includes provisions that will protect existing customers from increased supply costs resulting from the new service.

The PSC noted that this was the second time that it has ruled on cryptocurrency rates. The PSC in March ruled that upstate municipal power authorities could charge higher electricity rates to cryptocurrency companies that require large amounts of electricity to conduct business.

The New York Municipal Power Agency, or NYMPA, an association of 36 municipal power authorities in New York ranging in size from 1.5 MW in the Village of Silver Springs to 122 MW in the City of Plattsburgh, had petitioned the commission regarding concerns that high-density load customers, such as cryptocurrency companies, were having a negative impact on local power supplies.